Bank liquidity, mortgage rates to be impacted if US privatizes Fannie, Freddie

The prospect of Fannie Mae and Freddie Mac returning to the private sector would have substantial ripple effects on mortgage rates, bank liquidity and capital ratios.

During the financial crisis, the US Treasury Department obtained warrants to purchase majority stakes in the Federal National Mortgage Association, or Fannie Mae, and Federal Home Loan Mortgage Corp., or Freddie Mac. Those warrants expire in 2028. While they could be extended, President Donald Trump's administration could opt to end the conservatorships of the government-sponsored enterprises (GSEs).

Scott Turner, secretary of the Department of Housing and Urban Development, reportedly told The Wall Street Journal that privatization of Fannie Mae and Freddie Mac is a priority. One privatization proposal estimated the GSEs' value at more than $330 billion, according to the report.

Federal lawmakers may be able to glean how the administration plans to move forward during a Feb. 27 Senate Banking, Housing and Urban Affairs Committee hearing on the nomination of Bill Pulte, whom President Trump selected to lead the Federal Housing Finance Agency, the regulator that oversees of Fannie and Freddie.

Reprivatizing the GSEs is on the table because of the "sheer amount of money that it could raise for the federal government," said Ed Mills, a managing director and Washington policy analyst at Raymond James & Associates, in an interview. However, garnering enough political support for such a move is complicated by the interest rate and housing situation.

"We're just in an environment right now where affordability is pretty constrained anyway because home prices are so high and mortgage rates are so high," Jeana Curro, a mortgage-backed securities (MBSs) strategist at BofA Securities, told S&P Global Market Intelligence.

Privatization stands to drive mortgage rates higher as it would likely mean at least some weakening of the guarantee status of GSE-backed mortgages. The lack of a firm government backstop would push mortgage rates up as lenders or bondholders would want compensation for taking on additional risk in the event the GSEs are unable to cover borrower defaults.

Bank regulators will need to assess whether to reconsider the risk weighting for banks' exposures to Fannie Mae and Freddie Mac MBSs in the event of the GSEs' privatization.

"I would expect guidance and rulemaking with respect to changing the capital impact for MBS from Fannie and Freddie," Joseph Silvia, a Duane Morris LLP partner who advises financial institutions on M&A and other topics, said in an interview.

The risk-weighting issue is something to watch, according to Isaac Boltansky, managing director and director of policy research at BTIG LLC, though Boltansky is not sure it would change at all.

"Our sense is that the bank regulators would be inclined to maintain the status quo on GSE MBS if [Fannie Mae and Freddie Mac] were to exit conservatorship given the combination of a limited explicit guarantee and regulatory aversion to volatility," Boltansky wrote in a late December 2024 report.

If the implicit guarantee is weakened, it could also mean the securities might not count toward liquidity asset ratios in the same way, said BofA Securities' Curro. It is possible that treatment could vary for future securities while the guarantee is grandfathered into legacy ones, Curro added.

Grandfathering legacy securities might reduce the immediate capital impact of a change in the treatment of GSE MBSs. Depending on market conditions, it could prove challenging for banks to quickly execute capital raises if GSE MBSs are looked at differently by regulators, said Kelly Brown, chairman and CEO of Ampersand Inc., in an interview. Clarity on what would change is of most importance, Brown said.

"What I hear from a lot of the banks that I talk to is transition to privatization ... just needs really careful regulatory oversight," Brown added.